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What Monsters Are Lurking in Your Credit Report?

Checking to see what’s in a credit report can be scary. Late payments, collections (eek!), and maxed-out charge cards—these are just a few of the slipups that could haunt your credit report. Fortunately, your recent behavior is judged more harshly than your current behavior, so these skeletons in your closet will eventually fade into the background if you start learning how to build credit the right way.

But unfortunately, you might have some monsters lurking in your credit report that are a little more insidious. Learn how to spot them, and what to do about them.

What’s in a Credit Report?

When it comes to your credit report, beware of three things that could cause your score to drop.

What’s in a Credit Report? Monster #1: A Bogus Credit Score

Here’s a fact that surprises a lot of people: Your credit score changes depending on who is requesting it. If a lender asks for your credit score, the credit-reporting agencies (Experian, Equifax, and TransUnion) will almost always apply something called the “FICO” formula.

Instead of applying the FICO formula, Experian, Equifax, and TransUnion will almost always apply the “Consumer” formula if you purchase your own credit score from one of the many websites promising a free annual credit report.

The trouble is that the Consumer score is almost always higher than the FICO score, so this score gives you a false sense of security. If you have a 720 Consumer score, you might only have a 660 FICO score. And because lenders almost always use the FICO score and never use a Consumer score, your interest rates would be substantially higher.

If you want an accurate indication of your FICO credit score, you have two options:

1) Have a lender run your credit. The upside is that you will receive FICO scores from all three of the credit-reporting agencies. The downside is that your credit score might drop if a lender pulls your credit score.

2) Run your own credit from FICO. The upside is that your credit score will not be affected if you pull your own credit. The downside is that you will receive only two FICO scores. Equifax and TransUnion are the only two bureaus that make FICO scores available to the general public. If you want to also get your Experian FICO score, you will need to have a lender pull your credit.

What’s in a Credit Report? Monster #2: Inaccurately Reported Limits

About half of you have credit cards with limits that are being inaccurately reported to the credit bureaus. Fixing this can cause your score to jump quickly. A big part of your score—30 percent—is based on the limit-to-balance ratio of each of your credit cards. If your balance is less than 30 percent of your limit, you will fare better than someone whose balance is more than 30 percent of your limit.

But about half of credit card companies report your limit as lower than it actually is, and this causes your limit-to-balance ratio to appear higher than it actually is.

Say you have a $1,000 balance on your MasterCard, which has a $5,000 limit. You are only using 20 percent of the available credit. But if your MasterCard is reporting that you have a $2,000 limit, you will appear to be using half of the available credit.

Almost 80 percent of people have at least one error on their credit report, 25 percent of which are severe enough to cause a person to lose a job opportunity or loan.

That’s right: you might be unable to land a job if your credit score is low. When it comes to how credit scores affect you, most people know that their interest rates will be higher or lower, depending on their credit score. But what they don’t know is that a lot of employers will not hire someone with a poor credit score. Almost 60 percent of employers run credit checks. If you are applying for a job that requires you to be in contact with money, your credit will most certainly be checked.

So what should you do about errors?

First, download your credit report.

Second, make a list of errors, and separate high-priority errors from low-priority errors. High-priority errors include duplicate collection notices, accounts that do not belong to you, and derogatory payment information. A typo in your address is probably a low priority error.

Next, correct high priority errors by contacting your creditors and/or the credit bureaus. Stay on top of the process by logging all communications and following up. Remember that an error can cost you a job, or cause you to pay hundreds of extra dollars in interest!

Finally, pull your own credit report every six months to spot any new errors. Remember that your credit will not be hurt if you pull your own credit report. The credit-scoring bureaus know that you need to know what’s in a credit report. Pulling it is considered responsible behavior, so do it often!

Philip Tirone is the author of the 7 Steps to a 720 Credit Score system, a credit-improvement program that examines what’s in a credit report, advising people how to earn a great credit score as quickly as possible.